Monday, March 07, 2016

CEO's Bio Neglected to Mention Ties to 'Wolf of Wall Street'

An investor in Textura Corporation stated a claim that the company fraudulently omitted disclosing its CEO's prior ties to criminal stock promoters, including the "Wolf of Wall Street," Jordan Belfort. The Northern District of Illinois noted that although those events went back at least eight years and the SEC only requires companies to go back five, Textura volunteered the rest of the executive's bio, rendering the overall disclosure misleading (Kelsey v. Allin, March 2, 2016, Gettleman, R.).

The construction management software company raised $80 million in its June 2013 IPO but reported net losses in every reporting period thereafter. According to the plaintiff, the stock was artificially inflated due to omissions about the CEO's background, failure to report related-party transactions, and misleading statements to analysts about usage fees.

Misleading CEO bio. Immediately prior to co-founding Textura in 2004, Patrick Allin was CEO and acting CFO of Patron Systems, Inc. According to the complaint, he was involved with Thomas Prousalis, the mastermind behind fraudulent merger deals sold by Jordan Belfort's boiler room, Stratten Oakmont. The IPO materials and proxy statements failed to disclose this information, which allegedly would have tipped investors off to Allin's involvement with criminal stock promotors.

Item 401(e) of Regulation S-K only requires a brief description of an officer or director's business experience during the preceding five years, and Allin had worked for Textura for over eight years at the time of the IPO. Nevertheless, the defendants set out most, if not all, of Allin's other business experience, omitting only his tenure at Patron. "The failure to list his immediately preceding position when it is the lone 'negative' in his background suggests an intent to deceive," the court determined. The omission was material, and the facts alleged gave rise to a strong inference of scienter.

Remaining claims dismissed. The defendants defeated the remainder of the claims, however, successfully arguing that the challenged transactions did not qualify as related-party contracts under Item 404(a) of Regulation S-K. The plaintiff failed to state facts creating a strong inference of scienter as to the failure to disclose a cap on subcontractor usage fees. The court dismissed those claims as well as the related control-person claims.